The China Blog: Online Gaming, Telecom, Digital Home...

Thursday, February 08, 2007

Virtual Item Exchange Should be Legalized

Economics 101 says that when there's a demand, there should be supply. That is exactly what's happening with virtual item exchange. For those who don't follow the game market, virtual item exchange means using real-world currency to purchase virtual items. For instance, a player of World of Warcraft could buy a special sword from another player for $5 and enhance his gaming experience and a player of Second Life could acquire a virtual castle for her avatar for $1,000.

Up until 18 months ago, most of the virtual item exchange activities happen in the "black market". The End User Licensing Agreement (EULA) of most major MMOGs states that the game content cannot be owned, transferred, or modified by the subscribers. However, this legal detail has not prevented the emergence of a secondary market for in-game goods and services. Once a strictly avoided middle ground between players and developers, the emerging secondary market has generated significant revenues for players willing to risk potential penalty, such as account cancellation. On the other hand, the secondary market may allow moderate and casual gamers who otherwise wouldn’t have time to develop their characters to high levels to explore new worlds by acquiring characters or levels. Total sales are estimated to be worth more than $800 million a year, all of which is currently going to players and organizations outside the traditional MMOG value chain. IGE and Ebay are both important players in the market, and they generate revenue by charging listing fees and commissions. Ebay announced last week that it will ban such activities going forward due to legal concerns.

Sony Online Entertainment was among the first publisher embracing virtual item exchange. It announced yesterday that "the online auction site it launched in June 2005 to allow players of its "EverQuest II" multiplayer online game to pay real money for virtual characters and items, generated $1.87 million in player transactions during its first year. SOE said players paid as much as $2,000 for a single character, with one seller earning over $37,000 from 351 auctions. The company said a stable exchange rate emerged for virtual currency within the game, which for the year averaged out at $7.35 for one piece of in-game platinum."

Station Exchange went live in July 2005 and charges a $1-10 listing fee and an additional 10% transaction fee based on the final sale price. Only available on a pair of Everquest 2 servers, it logged more than $180,000 in transactions in the first month of operation. Average players on the Exchange used the service to purchase $70 worth of in-game goods.

Due to the lack of legal status and regulation of such activities, the secondary market remains a polarizing issue among both MMOG operators and players. Developers/publishers should push for legalization of virtual item exchange and decide how to make use of this market mechanism. Players have proven that there is significant demand for such a service, and it can develop into a lucrative market. Game publishers and service providers should embrace the secondary market instead of fighting it. If they don’t monetize this trend, others will. And if it's not legalized, social problems such as robbery and money laundering are more likely to occur.